Private Equity: What to Consider Before Investing

Last updated: September 3, 2026.

Quick Answer

Before investing in private equity, understand four structural realities of the asset class (long 8 to 12+ year investment horizons, binding capital calls that require liquidity readiness, high total costs including performance fees, and low transparency due to the lack of standardized reporting) and then make five decisions about how to invest (whether PE complements your existing portfolio, which fund type suits your risk profile, whether you want a sector or geographic tilt, how you want to access the fund, and what specific terms you want in your side letter). Once invested, keeping a reliable overview of unfunded commitments and returns across multiple funds is one of the largest ongoing operational challenges.

Key Takeaways

• Private equity investments are illiquid, binding, and typically span 8 to 12+ years, in contrast to publicly traded stocks that can be sold within minutes.

• Investors commit a defined capital amount to a fund and must meet capital calls promptly when the fund draws down against that commitment.

• Private equity total costs include management fees, carried interest (typically 20% above an 8% hurdle rate), and deal fees, all of which are meaningfully higher than public market investing.

• Private markets lack standardized reporting requirements, so comparing performance across funds requires applying consistent calculation methods to inconsistent raw data.

• Five investor decisions define how a private equity allocation is structured: portfolio fit, fund type, sector or geographic tilt, access method, and side letter terms (including MFN clauses).

How Is Private Equity Different From Public Markets?

Buying public stocks in a company and investing in a private equity fund are two very different things.

Investments in public stocks are liquid investments, whereas private equity investments are illiquid and can't be sold from one minute to another.

The public market is highly regulated with stringent reporting rules for listed companies. On the other hand, the private markets have no standardized reporting practices and are therefore less transparent than the public market.

There are many reasons why the private equity universe is much more complex than the public stock market. Therefore, there are certain things that you need to be aware of before entering the jungle that private equity can be.

In this article, I'll take you through 4 things you need to be aware of and 5 decisions you have to make before investing in private equity.

Let's go!

Or wait, let's just take a quick recap of how private equity investment works in case you haven't read our article Private equity: What is it? (but of course, you have).

How Does a Private Equity Investment Work?

A private equity investment is a binding capital commitment made by a Limited Partner (LP) to a private equity fund managed by a General Partner (GP), where the LP contributes capital in installments each time the GP issues a capital call. Instead of paying that amount immediately, you make a capital commitment, known as a commitment in the private equity world.

This commitment is binding throughout the fund's lifespan and allows the fund to make capital calls when they need capital from their investors (you) for acquiring new companies or covering expenses. The portion of your commitment that you haven't fulfilled yet is referred to as your unfunded commitment.

Members of a private equity fund can be broadly divided into two parties – a General Partner (GP) and a group of Limited Partners (LP). The General Partner is the private equity company that establishes the private equity fund, raises capital from investors, and manages the fund, while the Limited Partners are the investors who commit capital to the fund.

Now, let's explore the considerations you should be aware of before investing in private equity.

What Are the Four Structural Realities of Private Equity Investing?

1. Private Equity Is a Long-Term Commitment With Unique Fund Dynamics

Private equity investments typically span 8 to 10 years, and can extend to 12 to 15 years, before the fund distributes final proceeds back to investors.

This can be illustrated by the so-called J-Curve (see graphic below), illustrating the fund's value across the four phases of its lifecycle.

In this curve, the fund only reaches liquidity equilibrium in the last phase of the life cycle – when companies are successfully sold with profit. Only then will you, as an investor, realize gains from your investment.

It's crucial to evaluate whether this long repayment period aligns with your investment time horizon, given the binding nature of your commitment. Because while there are cases where one can withdraw from a commitment, it usually happens under very unfavorable conditions.

2. Capital Calls Require Immediate Liquidity

A capital call is the fund's demand for a portion of the LP's committed capital, and the LP must fund it within the notice period defined in the Limited Partner Agreement (typically 10 business days), regardless of market conditions or other liquidity constraints.

Though highly unlikely, should all the funds you've invested in call for your unfunded commitment at the same time, you must be able to meet all of their capital calls. Ensuring total liquidity readiness at all times is therefore of the essence when investing in private equity.

Importantly, financial crisis situations that can make it challenging to realize other assets are no exception.

Ensuring total liquidity readiness at all times is of the essence when investing in private equity.

3. Total Costs Are Meaningfully Higher Than Public Markets

Total private equity investment costs typically run around 5% of invested capital per year over the fund's life, split between management fees (1.5% to 2%), carried interest (typically 20% above an 8% hurdle rate), and deal fees, which is meaningfully higher than the fee load on public market investing. See Investment costs associated with private equity for the full breakdown. In addition to operating expenses, there's the General Partner's performance fee – known as their carried interest – which they receive when the fund's returns exceed the specified hurdle rate.

4. Private Equity Reporting Is Not Standardized

Investments in private equity are less transparent compared to traditional asset classes like stocks and bonds. As mentioned, the private equity market lacks the same level of regulation as the publicly traded market, where stringent reporting requirements dictate when and how publicly traded companies should report and disclose information.

As a result, there are no rules or common standards telling funds how to report on their investments. It largely depends on each fund to decide how they report and calculate various private equity metrics. This is essential to keep in mind when comparing different private equity investments. Read more about this issue in our article on creating a comprehensive private equity overview.

Aleta applies a consistent calculation methodology across every private equity fund a family office invests in, so returns and costs are comparable across managers even when the raw data from the GPs is not. Aleta was named Best Data Provider at the Family Wealth Report Awards 2026 for exactly this kind of consolidation quality.

It largely depends on each fund to decide how they report and calculate various private equity metrics.

What Five Decisions Do You Need to Make Before Investing in Private Equity?

1. Does Private Equity Complement Your Portfolio?

When considering investing in private equity, it's crucial you assess whether such an investment complements the rest of your portfolio. Does it align with your investment strategy and risk profile?

2. What Type of Private Equity Fund Do You Want to Invest In?

Various types of private equity funds exist, each with different strategies and risk levels. Capital funds and venture funds are two of the most popular types. The maturity and establishment of the companies they invest in can vary from fund to fund.

In general, the newer and less established a company is, the higher the risk associated with investing in it. You have to determine the level of risk you are willing to take and choose a fund type that aligns with your risk profile.

3. Do You Want a Specific Sector or Geographic Tilt?

Private equity funds often focus on investing in companies with common characteristics, such as a specific industry or geographic region. Consider whether there's a particular sector you'd like to invest in and choose private equity funds that align with your preferences.

4. How Do You Want to Access the Fund?

This might sound like an odd question, but there are, in fact, several ways to invest in private equity. Keep in mind that the investment approach you choose can involve different layers of costs.

Consider whether you want to invest directly in a private equity fund to minimize costs or if another method suits your situation and investment strategy better.

5. Do You Have Specific Side Letter Requirements?

"Now, what is a side letter," you may ask.

When investing in a private equity fund, many investors have a side letter drawn up with specific requirements that the fund must commit to before entering a Limited Partner Agreement.

This could include specifying rights for a potential resale of commitment, receiving notifications if another investor misses a capital call, or establishing ethical frameworks.

In the context of side letters, the concept of most favored nation (MFN) is often used. If your side letter includes an MFN agreement with the fund, it means that if new investors join the fund later and negotiate better terms – for example, regarding costs – you, as an MFN, have the right to obtain the same terms.

However, this often applies only to investors with a similar commitment size and depends on when the new investors enter the fund. Achieving an MFN clause usually involves some negotiation.

If your side letter includes an MFN agreement with the fund, it means that if new investors join the fund later and negotiate better terms – for example, regarding costs – you, as an MFN, have the right to obtain the same terms.

Once the LP Agreement is signed, the operational work shifts to monitoring capital calls, distributions, unfunded commitments, and returns across every fund in the portfolio. This is where a consolidated reporting platform earns its keep. Aleta automates the ingestion of capital call notices, K-1s, and NAV statements from every fund and consolidates them into a single, verified view of the family's private markets exposure.